The Homeownership Society Was A Mistake

The Atlantic just published a new article that makes some of the same points about homeownership as my newly released chapter in Empowering the New American Worker. In fact, it makes some of the same arguments I’ve been making for years.

The article’s title pretty much tells it all: The Homeownership Society Was a Mistake. The author, Jerusalem Demsas, believes that “Real estate should be treated as consumption, not investment,” a premise that many Americans would be wise to follow.

Demsas points out that “’Buying low and selling high’ when the asset we are talking about is where you live is pretty absurd advice. People want to live near family, near good schools, near parks, or in neighborhoods with the types of amenities they desire, not trade their location like penny stocks.” She also notes that “A home is bound to a specific geographic location, vulnerable to local economic and environmental shocks that could wipe out the value of the land or the structure itself right when you need it.”

These are all good points and great reasons to avoid treating one’s home as an investment.

Demsas also mirror’s an argument I made in my October 2021 Senate Banking testimony:

Although home equity frequently represents a large portion of many Americans’ wealth, purchasing a home can be a risky investment that depends entirely on home price appreciation, an attribute fundamentally in conflict with housing becoming more affordable.

Although Demsas doesn’t delve into it, this dependence on home price appreciation is an even bigger problem given that federal housing policy is geared toward inducing more and more low-equity mortgage debt. It makes purchasing a home especially risky for those struggling to earn more stable income.

I seriously doubt Senator Elizabeth Warren (D-MA) would support federally backed leveraged stock market investing for all Americans, but that’s effectively what federal housing policy does. (Yes, she’s clearly willing to support “Wall Street” and “big banks” when it suits her, but let’s leave that for another column.)

In fact, for at least the past 20 years, home prices have exhibited similar volatility to equity markets. It’s not as if these facts have gone unnoticed, even by other writers in the Atlantic. But it’s still not perfectly clear what sort of alternative policies Demsas supports.

We certainly agree that a policy of promoting homeownership and disparaging renting is harmful. And we seem to agree that it is hypocritical for federal officials to espouse so-called affordable housing programs while promoting policies that increase home prices.

As for specific federal policy changes, I’m not so sure. Hopefully, Demsas will give my chapter a look and write a new piece. (Even if she disagrees with me.)

The broad point that I make in Cato’s new book, as in most of the pieces that I write on housing finance, is that federal policy is geared almost entirely to boosting demand. That’s a problem because housing markets are always supply constrained relative to many other types of consumption goods. It’s also a fact that those supply constraints are often driven by state and local rules and regulations. That is, many desirable locations are already “full” of housing, and only local governance changes can do anything about it, though even those changes are unlikely to have large near-term effects.

Given that reality, the best that the federal government can do is stop juicing demand. But that’s the opposite of what the federal government has done for (at least) the last 50 years.

All the federal involvement really started taking off in the 1930s, largely as an effort to boost jobs. But somewhere along the way, all the realtors, builders, and financiers figured out it was better to work with the politicians. Now we have a complete mess, one that has unequivocally made housing less affordable, especially for lower-income folks.

The federal tax code promotes mortgage debt. The Basel capital requirements promote holding government-backed mortgage-backed-securities (MBS). And Fannie Mae and Freddie Mac have long enjoyed special status relative to private companies. It’s impossible for the private sector to compete with the federal government, so providing government mortgage insurance and (even implicit) federal guarantees for MBS has had a predictable effect.

From 2009 to 2020, Fannie and Freddie’s annual share of the total MBS market averaged 70 percent, even though their charters explicitly prohibit excessive use of their facilities. Including Ginnie Mae securities, those that are backed by FHA mortgages, the federal share of the MBS market averaged 92 percent per year.

Few remember, though, that the situation wasn’t much different prior to the 2008 crisis. From 1996 to 2007, Fannie and Freddie’s annual share of the total MBS market averaged 60 percent, only about 10 percentage points lower than the post-crisis share.

It makes zero sense to plead for more federal help because too much federal help is exactly what got us here. Federal policies have consistently increased demand by making it easier to obtain home mortgages. There appears to be no momentum in Congress to reverse this trend, and only a fool would say that it has nothing to do with special interests.

If I’m wrong about that, then the new Congress can start with the lowest of the low hanging fruit. It can prohibit Fannie and Freddie from funding loans on vacation homes, and it can enforce their charters’ excessive use provisions. Then it can prohibit them from funding homes that cost more than $1 million and require “first-time homebuyers” to actually be those who have never owned homes.

I’m not about to hold my breath.